March 8 (Bloomberg) -- The Australian dollar is being overtaken by the Canadian dollar among commodity currencies as the safety of Canada’s banking system and ties with the U.S. economy spur investors to buy the loonie.

Options show demand for the right to sell the so-called Aussie and buy the Canadian dollar reached the highest last month in almost a year. A measure of traders’ expectations for price fluctuations indicates the loonie is the most secure bet relative to the Australian dollar since July as the global recovery shows signs of wavering.

At the start of 2010, the Aussie and loonie approached parity with the greenback as the revival in U.S. growth spurred demand for Canada’s energy exports while China’s expansion supported Australia’s iron ore and coal. The Aussie lost momentum as China, the nation’s largest trading partner, restrained lending to cool its economy while crude oil, Canada’s biggest export, surged to $80 a barrel.

“There’s a tremendous amount of positive sentiment for Canada right now,” said Camilla Sutton, director of currency strategy in Toronto at Bank of Nova Scotia, the second-most accurate currency forecaster in the year and a half ended in June, according to data compiled by Bloomberg. “The Australian dollar has already benefited.”

Best Performer

Australia’s dollar was the best performer in 2009 against the U.S. among the 10 most-traded currencies. It rallied 28 percent as the South Pacific nation skirted the global recession and its central bank became the first among the Group of 20 nations to boost borrowing costs.

Now, Australia’s currency may struggle as the pace of interest-rate increases slows and China’s imports of iron ore and copper fall short of last year’s record levels. While Chinese Premier Wen Jiabao affirmed a target of 8 percent growth for 2010, the same goal the government set and surpassed in each of the past five years, People’s Bank of China Deputy Governor Su Ning said the central bank is concerned about rising commodity prices.

The Australian dollar fell to 92.56 Canadian cents on March 4 after appreciating 10.5 percent last year in its biggest annual increase since 1994. It slid below the 200-day moving average against the loonie on Feb. 4 for the first time in a year and a half. The Australian dollar tumbled 21 percent the last time it did so in August 2008.

The Aussie will drop to 91.35 Canadian cents by September, according to Richard Grace, chief currency strategist in Sydney at Commonwealth Bank of Australia, among the five most-accurate forecasters for the Aussie and loonie last year.

The Australian dollar traded at 93.53 Canadian cents as of 12:53 p.m. in Tokyo.

Bullish on Loonie

In addition to the Aussie and loonie, the New Zealand dollar, South Africa rand, Brazil real and Norwegian krone are considered commodity currencies. The rand has declined 3.1 percent this year versus the Canadian dollar, the real has fallen 4.4 percent, while the kiwi is down 5.7 percent and the krone off 3.8 percent.

The bullish outlook for the loonie, as the Canadian currency is known for the image of the aquatic bird on the C$1 coin, reflects an economy expanding faster than analysts forecast, a reduced budget deficit and a banking system that avoided a collapse or the need for public capital.

Canada is on course to be the first Group of Seven nation to erase its budget gap after the global financial crisis. Finance Minister Jim Flaherty anticipated last week that the deficit will narrow to C$1.8 billion ($1.75 billion) in 2014 from a record C$53.8 billion last year.

Bank Profits

The economy expanded at a 5 percent annualized rate in the fourth quarter, the fastest pace since the third quarter of 2000. Australia’s grew 2.7 percent from a year earlier, while the economy of the U.S., Canada’s largest trading partner, increased 5.9 percent.

Canada’s financial system was named the soundest in the world for two consecutive years by the Geneva-based World Economic Forum. Toronto-Dominion Bank, Canada’s second-largest lender, Canadian Imperial Bank of Commerce, National Bank of Canada and Bank of Montreal all reported profits in the first quarter that beat analysts’ estimates.

Adding to the positive sentiment, Canada won 14 gold medals at the Olympics in Vancouver, the most by any country in the 86-year history of the Winter Games. The government contributed C$22 million to the “Own the Podium” program to help elite athletes train.

“It’s one more thing that puts Canada on the radar screen,” said Bank of Nova Scotia’s Sutton, whose firm trailed only Germany’s Landesbank Baden-Wuerttemberg in Bloomberg’s ranking of 46 companies for currency forecasting.

Currency Volatility

Measured against a basket of currencies from the Group 10 nations proportioned by how they trade against each other, the loonie is up about 20 percent in the past five years, according to Bloomberg Correlation-Weighted Currency Indexes. The Aussie gained 17 percent in the same period.

Three-month implied volatility for the loonie fell to 10.90 percent last week, from 12.59 percent on Jan. 21, the day U.S. President Barack Obama announced measures to impose limits on commercial banks to make them more secure. Volatility for the Australian dollar dropped to 13.44 percent, from 14.13 percent.

The difference in volatility was 3.57 percentage points on Feb. 19, the widest since July. Currency fluctuations may erode profits in carry trades, in which investors buy higher-yielding assets with amounts borrowed in nations with low interest rates.

Largest Premium

Investors paid the largest premium in almost a year last month for Australian dollar put options versus the loonie. The premium of contracts granting the right to sell the Aussie versus the Canadian currency in one week over those for buying increased on Feb. 8 to 1.18 percentage points, the biggest since April 2009, Bloomberg data show.

Aussie bulls say the nation will benefit as China’s economy grows even after its central bank raised reserve requirements for lenders.

The move in China “is a sign saying growth is very, very strong, and China and the region are doing very well,” said Paul Mackel, director of currency strategy at HSBC Holdings Plc in London.

“I would put the Canadian and the Australian dollars in the same camp,” said Shane Enright, a currency analyst in Toronto at CIBC World Markets Inc. “I’m not convinced you’ll see either outperform the other. Right now people are afraid of the euro, and they’re looking at places they deem safe. That pretty much seems to be Sweden, Canada and Australia.”

Bank of Canada

Australia’s dollar will appreciate to 97 Canadian cents by April, according to Shaun Osborne, chief currency strategist in Toronto at Toronto-Dominion Bank.

The potential for Canada’s interest rates to increase at a faster rate than Australian borrowing costs may give the loonie an edge.

After its March 2 meeting, the Bank of Canada indicated it won’t extend a conditional commitment to keep its benchmark lending rate at a record low past June. It also didn’t repeat a phrase warning of the risk of slow inflation, after consumer prices rose the most since November 2008 in January.

On the same day, the Reserve Bank of Australia said after raising the benchmark cash target rate to 4 percent that inflation would likely be “consistent” with its target, a sign the pace of rate increases may slow.

‘Needs to Do’

The Bank of Canada will boost its target overnight rate by 2 percentage points to 2.25 percent by the middle of next year, compared with an increase of 1.25 percentage points to 5.25 percent for Australia’s rate, according to the average forecasts in Bloomberg News surveys of economists.

“We don’t think the market is fully pricing in how much the Bank of Canada needs to do,” said Matthew Strauss, senior currency strategist in Toronto at Royal Bank of Canada. The bank forecasts that the loonie will strengthen beyond parity to C$0.98 against the U.S. dollar by the end of the second quarter, while the Aussie will be little changed at 91 U.S. cents.

“The narrowing in that interest-rate spread will provide further support for the cross to come down